Certificate of Deposit (CD)

Certificate of Deposit (CD)

See Also:
Loan Term
Commercial Paper
Term Deposit
Treasury Bills (t bills)
Federal Funds Rate Definition

Certificate of Deposit (CD) Definition

A Certificate of Deposit or CD is a special type of time deposit used by many financial institutions, usually a commercial bank. Certificates of deposit generally offer fixed rates of return for periods of 1 month, 3 months, 6 months, 1 year, or more depending on the investor’s preference.

Certificate of Deposit (CD) Explained

A Certificate of Deposit is generally used by investors who need a short term arrangement to earn a fixed return. CD rates are better than a savings account, but are different in that the money can not be withdrawn until the end of the CD term. Certificate of deposit early withdrawal will cost the investor to pay a large penalty. This means that the investor must be absolutely sure the funds can remain untouched until the certificate of deposit maturity.
Certificates of deposit risks are generally restricted to the early withdrawal because it is unlikely that any of the financial institutions will default on CDs because of their short term nature. CDs that are denominated in $100,000 and above are referred to as negotiable certificates of deposit. This allows the investor to determine the penalty of early withdrawal as well as the rate of return. Other terms can also be calculated into the negotiable CD.

Certificate of Deposit (CD) Example

Bob has $1,000 in a savings account, but he would like to earn a greater return than the 0.5%. Bob goes to his bank and decides that he would like to invest his funds into a certificate of deposit so that he might earn a more meaningful return from the bank. The bank offers CD terms of 1.35% for a 3 month period. Bob decides to go forward with the agreement and at the end of the 3 month term he has earned interest of $3.38. This number is opposed to the $1.25 that would have been earned had Bob stayed with the savings account.
certificate of deposit

ARTICLES YOU MIGHT LIKE

Mining the Balance Sheet for Working Capital

Mining the Balance Sheet for Working Capital Let’s face it… There has been significant liquidity in the marketplace over the past couple of years. Debt and equity capital has been relatively easy to find and commercial banks have been very willing participants as capital providers; however, many of the commercial banks have admitted that this robust marketplace

Read More »

Is Your Business Bankable?

Businesses call us for many reasons but here are two very common reasons why we get called… They are growing and want to strengthen the financial function. OR They are in financial distress and can’t find a way out. Why does a business need to be bankable? What does being bankable mean? In this blog,

Read More »

Alternative Forms of Financing

It happens all the time. Companies need capital, but they aren’t bankable. Banks or other financial institutions will not touch them because they are either too risky, not able to meet covenants, or it just doesn’t work out for some reason. So, where do those companies go? They need to look at alternative forms of

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE
Share on facebook
Share on twitter
Share on linkedin

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

June 13th - 16th 2022